This article is a follow-up to the April 7 article, Stop following Musk and do your job!
By Shawn Sinclair Smith, president and founding director of Siviniti
Unlike most of you, Elon Musk is not in the trenches trying to build an installation, engineering or sales company. More than a CEO, he is a change agent and he knows exactly who he is and who he is not. This is something I admire about him. He intends to leave a legacy of change, creation and industries that rode on his coattails. Epic goals; however, the rest of you need to pay your bills and figure out how to change with this industry where cost is folding in faster than most can adjust. The difference from Musk: You must be profitable or you will cease to exist.
My first article in this series focused on emulating methods of leaders such as Musk and the pitfalls in doing so. Here, I will attempt to point out some methods used by SolarCity and other organizations that you should not attempt to repeat. After the last article, I received many messages both praising my stance and condemning me for being a moron. I should be very clear, I am not interested in what the majority of the industry thinks, nor am I in this arena for religious reasons. My clients and audience have nothing to gain from someone who follows the political push of green. Rather, they require someone who speaks honestly and is sometimes contradictory. Unfortunately, much of our industry was spawned by academics with no concept of construction, consumer awareness, profitability or care of taxpayer waste. Most of you live in the real world, and this is for you.
Let’s focus on vertical integration. This is the practice of owning the value chain including, but not limited to, marketing, sales, engineering, procurement and construction. I’ve heard the early solar industry be compared to Henry Ford’s vertical integration of the automobile industry. He ran the rubber plantations, owned railroads and glassworks and assembled the cars. If this analogy was being held against electric cars and Tesla, I would award you a point, but the solar industry in the United States has never been completely reliant on vertical integration to gain footing. This was an idea which SolarCity could afford to try, and much awareness has come from it. This is where I love having someone like Musk in the space. He is willing to take the risk, believes wholeheartedly in what he is doing and knows some advancement will come from this, thus making the world a better place. This is what a change agent does. But I say again: You are not Elon Musk. Know who you are and execute accordingly.
As the clean energy industry grew rapidly, it was difficult to completely segregate and see each department of the sector stand alone and function. As the industry follows more mature construction sectors, we will see more stand-alone engineering, site surveying and permitting. As an industry grows, it spawns discontinuous opportunities, and we are seeing this in the growth of O&M. O&M was not initially integrated due to its lack of need when systems were so young. We are now seeing the need for O&M, and many companies are being built or sliding over to the O&M side. This is healthy and born out of need, not desire.
Where integration is killing our companies is when financers try to be installers, installers try to be sales drivers, and so on. Before adding another area of practice (such as sales), installers should ask themselves if it will pull down net profitability. Be very careful when inserting yourself into your own value chain. Deep analysis and counsel is priceless when making these decisions.
Know this: Entering other parts of the value chain will decrease your net profit margin per install. In many cases, this wipes out profitability all together. Construction will always have profit baked in as labor and materials are static. We see many companies—experts in their field of construction—deciding to expand their reach by integrating sales. Unfortunately, acquisition costs suck profit out of the industry like a hole in the ozone. I have seen many successful multi-generational companies add sales forces to their organizations because they “heard” this was the way to quickly build a solar company. On the contrary, for most, this is the way to sink a solar company fast. The counsel you take can be very costly. We will be discussing the costs of adding sales teams in another article.
Integration also causes bottle-necks, especially when you attempt to scale. Nowhere else in the construction industry do we see small jobs taking months to complete. Imagine any other area of practice where you can drag the customer out for months to get a $20,000 job done. Also, try to imagine surviving with more than 50% of all contracted jobs being lost before you get to work. This and other problems are caused as a direct result of vertical integration.
We, at Siviniti, have had the opportunity to work with several fully integrated companies and find profitability with one caveat. We stay local. Scaling a fully integrated company, in our experience, requires levels of segregation to mitigate risk and almost always requires multiples of top-line revenue to maintain stable earnings before interest, tax, depreciation and amortization (EBITDA).
Before making a big change with integration, feel free to drop me a private message and I’ll give you my quick feedback.
Shawn Sinclair Smith is the founding partner of Siviniti, a strategy and innovation consulting firm, working with client companies throughout the Americas. He is an entrepreneur, public speaker, author and father to three expensive teenagers. Follow him on LinkedIn.